Editor’s note- this is part eight of a ten-part series on the various asset types of DST offerings.
Part 8: Industrial Asset Classification Discussion
By Al DiNicola, AIF®
June 16, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, member of FINRA/SIPC
INDUSTRIAL ASSET CLASS
Industrial is one of several commercial asset classes and is also offered by sponsors of Delaware Statutory Trust (DST) . Cash investors as well as 1031 tax deferred exchange investors seek out industrial to add to their portfolios. There are different types of industrial buildings but many of the DST offerings are focused on the larger distribution centers, industrial manufacturing facilities and potentially building that house production facilities. For the purposes of this writing, we will focus on the larger buildings and not the smaller flex spaces (while very popular). The rationale may be the smaller buildings are not in much demand of DST offerings.
Over the past few years and surely aided by the COVID 19 pandemic, the large warehouses have become very popular in all commercial offerings. This may be a Real Estate Investment Trust (REIT) investing in a new distribution center (AMAZON) including a last mile distribution center to a very large (2 million square feet) automobile motor parts distribution facility. The industrial DST offerings may be a single site offering or a portfolio of industrial facilities. The portfolio may also have geographical diversification meaning located in several markets or states. The Industrial asset class has had fewer offerings when compared to the multifamily DST asset class. When offered the Industrial DST asset tend to sell out quickly.
Structure and function of industrial buildings.
Over the past five to ten years Logistics has been a buzz word for describing many aspects of the economy. This is also true on the storage and distribution of goods that are found inside industrial and manufacturing buildings. The industrial buildings are very large and typically there is minimal office space. Suffice to say industrial space is important in all regions of the country. The purpose of this article is to focus on the investment into industrial space. The continued development of manufacturing facilities in the US has had it challenges with many products being made offshore. However, once these products (even though produced abroad) may need to be assembled, stored, and ultimately deliverer to market for the consumers. There is a move to bring manufacturing back to the US known as “onshore”.
Industrial development considerations
Many areas of the country have seen an increase in the development and delivery of industrial space. Most notably the south has seen an increase compounded by increased migration of population. That does not mean other areas of the country are not seeing growth especially along the major transportation interstates. Every product that is purchased in the store or on line may move through many steps while being produced, packaged, loaded and delivered to the final destination. (Although at my home many of the Amazon deliveries are returned, but that is another topic). Where the individual facilities are located needs to be vetted as to the best location to handle the specific requirements of the delivery process or supply chain needs.
Some structures and properties may be owned by the end user of the building but if not, is owned by an investor. The investor then would lease to users of the space. The larger facilities are typically owned by public entities because of the sheer size and cost of the building. These public companies may be REITs either publicly traded or non-traded. Sponsors of DSTs will seek out well located industrial buildings to package the property. These packaged offerings will facilitate the needs of cash investors as well as 1031 tax deferred exchange investors.
Fast facts on Industrial Asset class
- Location is very important for a number of reasons. Yes- location, location, is still valid.
- Access to all transportation methods: highways, railways and air transportation should be motivating considerations.
- Moving goods via truck is a vital primary component of the supply chain. The location of buildings with close adjacency (and visibility) to interstate highways becomes an added benefit.
- New needs force new designs. Long gone are the days of shaky buildings with outdated facilities (amenities) inside and out. The bar has been raised on what the long-term users expect from the environment. The institutional investors are on board with providing the necessary capital to entice specific users to engage for long term. The end result is an increased appeal for the physical structure which may be a valuable consideration when ultimately sold.
- The overall size in square footage and cubic volume is increasing. The warehouses (bulk storage) are becoming larger and larger. Not only the building sizes but the overall size of the land mass that permit potential expansion and more truck and trailer storage.
- Raise the roof! Looking in the rear-view mirror 24 feet clear ceiling height was the standard. Currently the desired height is 32 feet and 36 feet. You may hear the reference clear ceiling heights and that would be calculated from the floor to the ceiling. Higher ceiling means more volume for goods. Recent improvements in the storage capacity of the racks inside the buildings (racking systems) increase the bulk storage capacity (volumetric storage space).
- The depth of the newer buildings is a factor that is becoming more important. Typical industrial buildings may have a depth of 150 to 160 feet (larger than flex at 120 feet). The newer building may have depth as long as a football field and up to 400 feet deep.
- There is a need for additional outside space. Occasionally we neglect to consider what goes on OUTSIDE the warehouse. To expedite the movement of goods there have been noticeable changes adding to the efficiency of the operation. There is need of ample tractor trailer storage as well as parking and providing a safe space for maneuvering the big rigs. The need for extra space equates to larger overall sites.
- There have been building efficiencies improvements including added insulation and other advancement in protecting mechanical components. There may also be considerations for needed air conditioning for the items being stored even temporarily inside the warehouse. Certain buildings may also have dedicated frozen sections as well.
The investment Focus
Nearly every offering Private Placement Memorandum (PPM) includes a section or disclaimer on the COVID 19 potentially disrupting business. Some companies may have increased inventory which currently may create other unintended consequences as the consumer is rethinking their buying habits and needs as a result of inflation. However, AMAZON and others continue to secure well located bulk storage facilities with larger truck courts as well as facilities known as Last Mile Distribution Centers. Many consumers utilize e-commerce and have packages delivered nearly every day to their doorstep. We are all familiar with the delivery vans (originating from the last mile distribution centers) that show up nearly every day of the week to our homes.
Typically, DSTs (and other NNN) require the tenants to take care of repairs. However, there are occasions where the investors or sponsors are responsible for structural components. Those details would be included in the lease agreement along with renewal options, rent increases and other details.
Investment structure will vary depending on the sponsor offering.
- DSTs are long term assets that may range between 7-10 years.
- By design many of the DST offerings are structured with leverage. However, there are a few all-cash offerings from time to time.
- The leverage is non-recourse and may satisfy the investor’s IRS requirements of replacing the debt under the 1031 tax deferred exchange.
- There may also be offerings with increased debt or loan to value (LTV). By design a higher LTV may be in place to offset higher debt replacement needs.
- Distribution will vary depending on the individual offerings.
- There is also a structure referenced as Zero Distribution (similar to a zero coupon). Rather than paying an annual distribution to the individual investors all distributions are dedicated to paying down the loan on the property. The investor may benefit from a lower loan payoff when it comes time for the property to be sold.
- The tenant quality may include a local single user to a national credit rated quality tenant.
- There has been single tenant user who have owned their building for many years and have equity in the property. These users include private and public companies. These users may execute a sale lease back (pulling cash out of the property) and then execute an extended long-term lease. The cash would be used to make improvements to an existing structure.
- Large users (Amazon, major auto manufacturers, etc.) will make a substantial investment inside the building including robotics to assist in the processing and needs of the business.
Industrial has demonstrated a track record of a stable investment asset. There is a growing need for additional industrial space in many locations throughout the country. DSTs may provide tax favored returns. If you are considering an investment, please consult your financial advisor for additional information.
DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email email@example.com.
This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission).
NAMCOA’s corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
NAMCOA® – Naples Asset Management Company®, LLC